How and when should I move to a safer retirement portfolio?

I'm in my early 50s and plan to retire a little before I hit age 60. My savings are now invested in a combination of stock mutual funds and company stock. When and how should I start allocating to a safer portfolio?—R.A.

Whether you're simply being prudent by doing some advance planning or you're concerned that the recent market volatility is a prelude to an imminent crash, you're right to start thinking about how to transition your portfolio to a more conservative stance well before you actually retire.

After all, investing heavily in stocks may be okay when you're younger and more willing to take more risk for higher returns since you have plenty of time to rebound from market setbacks. But an overly aggressive investing strategy that leaves you vulnerable to severe market downturns as you near the end of your career can be dangerous.

A big drop in the value of your nest egg just prior to or soon after retiring can dramatically reduce the chances that your savings will be able to support you throughout a long retirement. The reason is that the combination of outsize investment losses plus withdrawals from your savings for retirement income can so deplete your portfolio's value that it may not be able to recover sufficiently even after stock prices begin rising again.

Unfortunately, whether due to complacency, failure to comprehend the risk they're taking or some other reason, many people fail to dial back their stock holdings as they enter the home stretch to retirement. For example, an Employee Benefit Research Institute report found that prior to the financial crisis, when stock prices plummeted nearly 60%, more than 40% of 401(k) participants between the ages of 56 and 65 had over 70% of their account in stocks and nearly 25% had more than 90% in equities.

So how can you get adequate protection against market setbacks while also providing enough long-term growth potential so your savings will be able to sustain you throughout a retirement that, given today's long lifespans, could last 30 or more years (or in your case even longer)?

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Start by settling at a mix of stocks and bonds that's appropriate given your circumstances today. There's no single stocks-bonds allocation that's correct for everyone of a given age. But it's fair to say that for someone in his 50s who's hoping to retire in 10 or so years, a 100% stocks portfolio is pushing it. So I urge you to re-think how much risk you want to be taking as you close in on your planned retirement date.

One way to arrive at a blend of stocks and bonds that makes sense for you is to consult a tool like this asset allocation-risk tolerance questionnaire. The tool not only recommends an appropriate mix of stocks and bonds, but also shows you how that mix as well as others have performed on average in the past as well as in up and down markets.

You don't necessarily have to adopt this mix exactly. You could decide to opt for more stocks on the rationale that, since you plan to retire early, you'll need more robust returns to sustain your portfolio through what will likely be a longer-than-normal retirement. Or you could lighten up on stocks, figuring you don't want to run the risk of a big setback early in retirement that could shorten the longevity of your portfolio. As a general guide, though, a stock stake of somewhere between 65% and 75% of assets would generally be considered reasonable for investors in their early to mid-50s.

Whatever mix of stocks and bonds you settle on, you next want to think about what you'd like your stocks-bonds allocation to be when you actually retire. The mix that makes sense for you as you enter retirement will depend on a number of factors, including how comfortable you are seeing your nest egg's value bounce around in response to market fluctuations, how likely your nest egg is to last given the size of the withdrawals you plan on taking, what other resources (Social Security, pensions, home equity, annuity income, etc.) you have to fall back on should your pot of savings start running low. As a practical matter, however, many people enter retirement with somewhere between 40% and 60% of their savings in stocks.

Once you have that target retirement allocation, you can then think about creating a "glide path" that gets you from your current stocks-bonds mix to the one you would like to have at retirement. So, just as an example, someone who's 50, has decided to invest 70% of his savings in stocks today and plans to retire in 10 years with 60% of his nest egg in stocks, might reduce his stock holdings to 65% by age 55 and then to 60% by age 60.

That's not to say you've got to stick to a strict schedule of reducing the stocks percentage of your portfolio by precisely one percentage point a year. But the idea is to gradually shift to a more conservative portfolio, so you don't find yourself with such a large exposure to stocks as you enter retirement that a market downturn would require you to dramatically scale back your retirement plans or even force you to postpone retirement altogether.

Related: Should I follow Warren Buffett's 90/10 investing strategy?

You don't have to decide this now, but at some point prior to retirement you'll also want to think about whether to continue to reduce your stock holdings during retirement and, if so, the extent to which you'll want to do that. The rationale for continuing to reduce stocks as a percentage of your holdings even after you retire is that, as you age, you may become increasingly anxious at seeing your nest egg lose value during periods of market turbulence. Still, you'll want to keep at least some portion of your savings in stocks throughout retirement, if only to help maintain the purchasing power of your savings should you live well beyond life expectancy.

You can get a sense of what sort of glide path might be right for you by seeing how the target-date retirement funds of companies like Fidelity, T. Rowe Price and Vanguard gradually wind down their stock holdings in the years leading up to, and then during, retirement. In fact, you could simply mimic the glide path of such funds or, for that matter, invest your retirement savings in a target-date fund with a date that matches or comes close to the year you plan to retire.

Finally, you mention that your nest egg includes shares of your employer's stock (which, lest there be any doubt, should definitely count as part of your equity holdings). I'm not a fan of investing one's retirement savings in company stock. Shares of a single company—whether your employer's or not—tend to be more volatile than a diversified portfolio, which means your portfolio could be much riskier than it would otherwise be if you've got a good portion of your savings in company stock.

Besides, your financial fortunes are already tied to those of your company because your income depends on your employer. So why increase your exposure by having your portfolio's health dependent on the company as well? For those reasons, I generally think it's a good idea to avoid investing in company stock for retirement or at least limit it to no more than 10% or so of your nest egg.

That said, you could qualify for a potentially lucrative tax break on company shares held within a 401(k), particularly if those shares have appreciated substantially in value over the years (although taking advantage of that break can get complicated). So if you already own a significant amount of company stock in your 401(k), you might want to consult a financial adviser who can evaluate the risk vs. reward of holding onto those shares and, if appropriate, help you come up with a plan for distributing and eventually selling them in a way that will minimize the tax hit.

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